Bahraini Growth To Hold Up

At Fitch Solutions, we forecast Bahraini growth to jump from 1.8% in 2018 to 2.8% in 2019 before accelerating to 3.1% in 2020.

The construction and manufacturing sectors will serve as bright spots thanks to a substantial stream of infrastructure projects and the Alba Line 6 expansion project which will boost aluminium production.

That said, a combination of tight fiscal policy and the extension of OPEC-led oil production cuts will keep growth below historical averages.

We at Fitch Solutions believe that Bahraini growth will hold up over the next few quarters, forecasting headline economic expansion to come in at 2.8% in 2019 and 3.1% in 2020. Although higher than the Q119 estimate of 2.7% (see chart below), we caution that this would trend well below the five- and 10-year historical averages of 3.9% and 3.8% respectively.

Bahraini Growth To Hold Up In 2019, Accelerate In 2020

Bahrain - Quarterly Real GDP & Oil Sector Growth, %

Source: CIO, Fitch Solutions

Growth in construction and aluminium output will serve as bright spots. Over two-thirds of an extra-budgetary USD7.5bn development credit line awarded to Bahrain in 2011 by Saudi Arabia, Kuwait and the UAE (termed the ‘GCC Development Fund’) remain unused, suggesting that capital spending will be insulated from wider fiscal consolidation. Construction growth will be further aided by ongoing projects such as the USD1.0bn Bahrain International Airport modernisation programme and the USD5.0bn BAPCO Sitra oil refinery expansion project, pointing to a fairly sizeable stream of infrastructure projects ahead. The manufacturing sector will benefit from the Aluminium Bahrain (Alba) Line 6 expansion project, which is set to boost aluminium production by 20.0% in 2019 and 2020, according to our Commodities team.

That said, fiscal consolidation will moderate wider non-oil sector gains. The Bahraini authorities will continue to push on with an ambitious programme of fiscal retrenchment, part of a USD10.0bn bailout package agreed in mid-2018 with the UAE, Saudi Arabia and Kuwait. Under the programme, the government has already begun cutting electricity and water subsidies and has implemented a new 5.0% value-added tax (VAT). While this will help contain the budget deficit and improve macroeconomic stability, we expect to see a negative impact on short-term growth. As subsidy cuts and the VAT are phased in over the coming months, inflation is likely to flip back into positive territory, negatively impacting consumer purchasing power and reducing overall spending. As sales slow and profit margins shrink, private firms are also likely to put a hold on expansion plans. Combined with a weakening backdrop for global growth (see ‘August 2019: Potential Policy Missteps Pose The Largest Risk To Global Growth’, August 9), Bahrain’s wider non-oil sectors are likely to come under pressure in the near term, capping growth.

Sitra Refinery Expansion Project To Lift Hydrocarbon Production In 2022

Bahrain - Refined & Crude Production

e/f = Fitch Solutions estimate/forecast. Source: EIA, Fitch Solutions

Furthermore, hydrocarbon sector growth will likely stagnate over a multi-quarter horizon. While oil sector growth came in at 8.6% y-o-y in Q119, this was mainly attributable to base effects on the back of oil field maintenance works that led output to contract sharply in Q118. Bahrain remains compliant with an ongoing OPEC-led oil output restraint deal – which is now set to remain in place through 2019 and most of 2020 – effectively capping growth for the time being. That said, there are also structural factors that limit production regardless of the OPEC+ deal. Bahrain’s oil assets are mature, raising the cost and complexity of further development efforts. Newer discoveries - specifically the offshore Khalij al-Bahrain site – are also unlikely to yield significant output in the near term, given the considerable financial and technical barriers that stand in the way of extraction. Bahrain’s hydrocarbon sector will mainly grow from expanded refinery capacity over the coming years, especially as the Sitra refinery expansion programme comes online in 2022 (see chart above).